India: FDI In Indian Civil Aviation sector

The Indian Civil Aviation sector has seen a lot of growth since
the early 2000s. The "Open Skies Policy" initiated by the
Government of India ("GOI") led to a spurt of airlines
which have since catered to the growing passenger traffic.

Unlike elsewhere in the world, the Indian civil aviation market
is on an unprecedented rise with passenger traffic increasing every
year at a healthy pace, almost 20% annual growth which makes India
one of the fastest growing markets in the world. This growth has
put a lot of pressure in the allied infrastructure including
airports, ground handling, Maintenance Repair & Overhaul (MRO),
etc.

The Government has also allowed for the privatization of the
airport development sector in both Greenfield and Brownfield
projects. This resulted in the establishment of new airports in
Hyderabad & Bengaluru and the redevelopment of the airports in
New Delhi and Mumbai.

The FDI policy in the civil aviation sector can be divided into
the following 3 subheads:

Airports

Air Transport Services

Other Services under Civil Aviation
Sector

As per the GOI's Consolidated FDI policy of 2016, FDI
stipulations are as under:

Airports

In Greenfield projects, 100% FDI is
allowed through the automatic route.

In Brownfield projects, 100% FDI is
allowed. Out of this, proposals up to 74% FDI are allowed through
the automatic route while FDI beyond 74% requires GOI
approval.

Air Transport Services

For scheduled air transport services
and regional air transport services, FDI is allowed up to 100%. Out
of this, up to 49% FDI is allowed through the automatic route
whereas proposal for FDI beyond 49% require GOI approval. However,
for NRI investors, up to 100% FDI is allowed through the automatic
route.

For non-scheduled air transport
services, up to 100% FDI is allowed through the automatic
route.

For helicopter and seaplane services,
up to 100% FDI is allowed through the automatic route.

Other Services under Civil Aviation Sector

Up to 100% FDI through the automatic
route in Ground Handling Services.

Up to 100% FDI through the automatic
route in MROs, flying training institutions and technical training
institutions.

Further, some of the conditions attached to the investment in
either of the above 3 heads are as under:

Foreign airlines are allowed to
participate in the equity of companies operating Cargo airlines,
helicopter and seaplane services, as per the limits and entry
routes mentioned above.

Foreign airlines are also allowed to
invest in the capital of Indian companies, operating scheduled and
non-scheduled air transport services, up to the limit of 49% of
their paid-up capital. Such investment would be subject to some
conditions, like (i) it would be made under GOI approval route,
(ii) the 49% limit will subsume FDI and FII/FPI investment, (iii)
the investments so made would need to comply with relevant SEBI
regulations, as well as other applicable rules and regulations,
(iv) the Scheduled Operator's Permit can be granted only to a
company if it has registered its place of business in India;
Chairman and at least 2/3rd of the Directors are Indian citizens
and substantial ownership and control vests in Indian nationals,
etc.

Benefits of the FDI Policy

The primary benefit of this FDI
policy is that airport development has now been opened to further
investment. As we have seen from the examples of Delhi, Hyderabad,
Mumbai, Bengaluru and Kochi, privatization has certainly resulted
in improved service standards as these airports have only served to
enhance passenger experience. These airports have been consistently
rated as the best in the world. Increasing private involvement in
the form of FDI will only improve the quality standards of Indian
airports.

The Indian aviation market is
witnessing a period of boom wherein passenger traffic is increasing
at a healthy rate. Tier II & III cities are also witnessing
increasing frequencies and passenger traffic. Hence, this offers an
attractive investment opportunity to any foreign investor since the
passenger numbers are very healthy and hence the returns on
investment will be very positive.

Allowing for FDI in the scheduled
airline segment is also an attractive investment opportunity since
the passenger traffic is growing at a healthy pace. FDI has already
benefitted carriers like Jet Airways, Air Asia India &
Vistara.

Ground Handling and MRO services are
an unchartered territory since majority of the Indian airlines use
MRO services of Sri Lanka, Singapore, UAE for the maintenance of
their aircraft. India suffers due to the high taxation structure.
The MRO industry is estimated to be worth Rs. 50 billion and hence
offers another mode of foreign investment. Ground Handling is also
dominated by foreign companies majorly. Hence, Ground Handling can
also be a major avenue for FDI.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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